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Agency suing American Airlines over tax incentives

The agency that oversees public transportation in Chicago is suing American Airlines for falsely claiming to buy "vast amounts of jet fuel" from a small office in a rural community to avoid paying tens of millions of dollars in taxes in the nation's third-largest city, where the actual work is done.

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Agency suing American Airlines over tax incentives

DON BABWIN, Associated Press;
8:37 a.m. MST March 12, 2014

Regional Transportation Authority in Chicago is suing American Airlines over tax incentives.

An American Airlines plane sits at Phoenix Sky Harbor International Airport. The Regional Transportation Authority says the airline falsely claimed to buy jet fuel from a small office in a rural community to avoid paying millions in taxes to Chicago.(Photo: Patrick Breen/The Republic|azcen)

CHICAGO – The agency that oversees public transportation in Chicago is suing American Airlines for falsely claiming to buy "vast amounts of jet fuel" from a small office in a rural community to avoid paying tens of millions of dollars in taxes in the nation's third-largest city, where the actual work is done.

The lawsuit comes a year after the same agency — the Regional Transportation Authority — accused United Airlines in a lawsuit of doing the same thing in the same small town. The RTA filed its lawsuit in Cook County Circuit Court late Tuesday afternoon.

The RTA oversees the Chicago Transit Authority, the region's Metra commuter line and the Pace suburban bus service. The agency has been making the allegations against American for more than a year but said it was waiting for the airline to emerge from bankruptcy protection, something that happened in December.

As it said when it sued United, the RTA said American or its subsidiary, American Aviation Supply, could not possibly conduct the business of buying fuel for jets at one of the largest airports in the world, Chicago's O'Hare International Airport, out of an office that's less than 1,000 square feet (93 square meters) where one or two employees work. The office is in City Hall in the town of Sycamore.

"We're saying whatever work is being done there is a sham," Jordan Matyas, the RTA's chief of staff, said ahead of the lawsuit be filed.

Matyas said that while the lawsuit also names American Aviation Supply, American Airlines is responsible for what is being done — or not being done — in Sycamore.

"This is clearly American Airlines doing the deal," he said. "They set up a subsidiary in order to funnel the money and not pay the appropriate taxes."

RTA alleges that under the arrangement between Sycamore and American, the city reimburses the airline for a portion of the sales tax it pays on the fuel. According to the RTA, the Sycamore office cost the Chicago, Cook County and RTA a total of more than $23 million last year.

American Airlines spokeswoman Mary Frances Fagan said in an emailed statement that the company believes it is "still paying the proper" tax amount and that it's "in compliance" with the law.

Sycamore's city manager declined to comment.

The litigation is part of a barrage of lawsuits filed by the RTA, the city of Chicago and Cook County against communities outside Cook County that allege those communities' tax incentive programs are costing other government agencies millions of dollars.

Matyas said he believes an Illinois Supreme Court ruling in November strengthens the RTA's lawsuits. The court found in a case involving a fuel oil retailer that sales taxes must be paid by companies in communities where most of their business is conducted.

"The major point was these sham offices do not work and you've got to pay taxes … where you are actually conducting the business of selling."

Cook County Commissioner Larry Suffredin agreed, saying he hopes the ruling will persuade companies that have such offices to reconsider because, while the court decided that the companies should not be forced to pay Cook County for taxes they avoided before the ruling, it was clear in warning them that they will be on the hook for those taxes from now on.

"I think they're going to be nervous, absolutely because the court was saying … don't do it again," he said.